The Coming Margin Pressures at Apple (AAPL)

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Apple Inc. (NASDAQ: AAPL) has hit product after hit product.  While this will sound very bullish to the Apple addicts,  investors are concerned about sales of the new iPhones during the third quarter.  More importantly, everything is pointing to some pressure on Apple’s gross margins in the coming quarters. There is an analyst call with some concern, and other data pointing to more solid figures which will add to some of the concerns about the sustainability of Apple’s mega-growth path.

The research outfit at Kaufman has trimmed the unit sales expected from the new iPhone to 7.5 million units from an original projection of about 9.0 million (and versus what they call a street consensus of about 8.5 million units)  The issue is not so much one of the demand side.  Supply constraints in channel checks have brought up part of this concern.  The big issue is that Kaufman noted that the supply constraints could impact the number of units shipped for the next two quarters.

We have our own take on this supply issue.  The implications of a two quarter tight supply would not be the end of a trend for Apple.  The issue at stake is that this means much of the Christmas season will be in short supply of iPhones.  There is of course also the possibility that Steve Jobs can bully suppliers for the rest of 2010.

DigiTimes has noted that Apple is ramping up its iPad production for July.  If you have tried to buy an iPad at the Apple stores, you know that there are tight supplies still on those units.  The prior reports from DigiTimes were a target of 2.5 million units per month by the end of the year, and the ramp up is aimed to get to 2.3 to 2.35 million units for this current month.

And this morning, CNBC has referred to a New York Times piece discussing the coming rise in Apple’s manufacturing costs in China: “Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency  that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones.”  Can Apple pass on these rising costs?

Then there is some data from iSuppli… The materials cost on the near-$600 iPhone is only about $187.51.  With component supplies running tight, Steve Jobs has less of a chance of getting the gut materials and micro-components down much.  After you factor in rising labor costs AND a currency that is about to appreciate, Apple’s production costs are about to rise.  Those higher costs won’t just be for iPhones.  iPads, Macs, and the rest are probably all going to start having higher costs for each unit at Apple.  With the company already having a premium associated with its relative price to competitors, logic would dictate that Steve Jobs is just going to have to eat some crow here and just accept lower margins for his hot potatoes.

Just this April, Apple said that its gross margin was 41.7% percent, up from 39.9% in the year-prior quarter.  In January, Apple reported that its gross margin for the Christmas season quarter was 40.9%, up from 37.9% in the year-prior quarter.  Lastly, in October 2009, Apple reported that the September 2009 quarter end saw gross margin come in at 36.6%, up from 34.7% in the same quarter a year earlier.  Growing margins may become harder and harder for Steve Jobs and friends.

So far the concerns are muted in the market, partly because the market is having a stellar day.  The NASDAQ itself is up 1.9% at 2,131.40.  Apple is up just over 2% at $251.98 on only about 6.6 million shares after almost 90 minutes of trading.  Apple has now spent more days under its 50-day moving average (chart changes each day at Stockcharts.com) than it has since February, and that level today is $256.89.

JON C. OGG

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